The rise in popularity of funds platforms used by IFAs and intermediaries across Europe hasn’t been taken into consideration within the MiFID II implementation framework, according to the European Federation of Financial Intermediaries and Financial Advisers (FECIF).
The European Securities & Markets Authority (ESMA) has recently consulted the industry on ‘Product Oversight and Governance’ matters, in particular within the MiFID II implementation framework. And while welcoming the work being undertaken by EU body, FECIF said that it has concerns that a lack of understanding of the complex structure of platforms means that it is “practically impossible” to meet the deadlines and provide the information requested within the MiFID II structure and timeline.
FECIF said that it has “serious concerns” that the widespread distribution models in many European countries have not been taken into account and that timing issues could create regulatory arbitrage.
“Everyone needs a consistent approach which takes into account the existing variety of business models and their different characteristics,” said FECIF chairman, Johannes Muschik. “MiFID II defines the “target-market” which has to be taken into account by manufacturers of financial instruments within their product governance process. Distributors (including advisors and intermediaries) are obliged to gather all information about the target-market of each financial product that they intend to offer to their clients.
“There is also the concept of a “distribution strategy”. ESMA seems to have introduced a new definition for this, which was not the one intended in the level 1 (MiFID II) text, inferring that manufacturers also need to define “distribution strategies” and distributors need to gather all information about the distribution strategy of each financial product that they intend to offer to clients.
“ESMA is obviously assuming that there is always a direct relationship between manufacturers and distributors. However, this is not the case,” added Muschik.
FECIF points that in many European Member States the most common business models of cooperation between manufacturers and distributors are via “open-architecture” platforms, which often cooperate with thousands of different manufacturers and with hundreds or even thousands of distributors, all at the same time. Distributors contract with open-architecture platforms to become entitled to offer the whole range of financial instruments available on a platform, to their clients.
‘Lack of understanding’
“It seems apparent that the concept of “distribution strategy” introduced by ESMA will never work within the world of open-architecture,” Muschik added. “Manufacturers are simply physically unable to foresee or oversee the individual distribution strategies of so many distributors, who are usually totally unknown to them – as both parties are solely contracting with the platform and never have any direct interaction at all. This appears to show a lack of understanding of how the market works”.
Another point of concern for FECIF is the date of entry for the target market. ESMA defines the binding deadline for distributors as 3 January 2018, but has not stated a specific date for manufacturers, who should assign target markets following the next product review process cycle that is conducted after the 3 January, 2018.
“For the period between that date and the undefined date on which the manufacturers will have to confirm a definitive target market for their products, it seems that the sole responsibility for defining target-markets will be transferred to the distributor,” said to Paul Stanfield, secretary general at FECIF, pictured left. “This means that the distributer should effectively act as if the manufacturer was an entity not subject to MiFID II product governance requirements.
“Such an approach for MiFID II regulated entities would be practically impossible,” he said.
FECIF is concerned that a distributor could define a target market and the manufacturer determines a different target market at some later stage.
“Was the distributor then providing inappropriate advice?,” added Stanfield. “Do the clients automatically have a right of cancellation? Should the distributor inform the customer at outset that they believe they have correctly identified the appropriate target market, but do not know for sure whether the manufacturer will determine the same target market, or another, sometime later?
“None of these scenarios are ones that ultimately protect consumers in an appropriate manner. If you haven’t actually performed an advisory or intermediary role it can be very difficult to fully understand the relevant practicalities – and thus an unworkable framework can result.”
FECIF said that despite its concerns it will keep on working with regulators to try and ensure that regulation protects consumers in an “appropriate and feasible manner”.
FECIF is a Brussels-based non-profit organisation, representing in excess of 30 trade bodies or industry organisations; via these it acts on behalf of over 245,000 advisors and intermediaries in Europe – and around 640,000 individuals in total.